GAO considers refinery outage impact data gaps

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Aug. 4 -- While most refinery outages have modest, if any, price impact, analysis of the relationship could be improved, the Governmental Accountability Office said in a July 30 report. Gaps in federal data limit analyses of outage price effects and other issues, it indicated.

The report recommended that the US Energy Information Administration administrator convene a panel from other government agencies, the oil industry, public stakeholders, and other analysts and data users to find ways to improve available information.

It said that on rare occasions, events such as Hurricanes Katrina and Rita in 2005 can put enough refining capacity out of commission to have an obvious impact on prices. “While extreme outages can cause large temporary price increases, such events were relatively uncommon during the period of our analysis,” the report said.

During the period from 2002 through September 2008 in which GAO examined US wholesale prices across 75 US cities, the report said that of about 1,100 unplanned outages evaluated, 99% were associated with unbranded wholesale price increases of no more than 32¢/gal, and 75% were linked to increases of less than 6¢/gal in affected cities.

Planned outages, where refineries are shut down for maintenance or equipment upgrades, generally did not have a significant effect on wholesale product prices, it continued. Such shutdowns typically come when demand is seasonally down and interspersed among refiners and refineries, it said.

Planned in advance
“In addition, the equipment and labor are generally booked months, or even years, in advance, and can be arranged with those customers with whom the refiners have long-term contracts at a cost less than would be required in an emergency or unplanned situation,” GAO’s report said.

It said that oil industry representatives also told GAO’s researchers that because a refinery must draw on a limited number of equipment manufacturers and skilled laborers, its maintenance plans eventually become public knowledge. “In this case, the market ‘expects’ the outage to occur; therefore, planned outages do not generally trigger significant price responses unless something unexpected occurs or the market is disrupted elsewhere,” it said. Refiners also stockpile products to prepare for planned outages so they will not come up short while the plant work is going on, it added.

Unplanned outages, on the other hand, were associated with gasoline price increases, but the increases were generally small and depended on key factors, including whether the gasoline was branded or unbranded and the type of gasoline being sold, according to the report.

It said that GAO’s examination found that wholesale gasoline prices rose more for unbranded than branded customers following an unplanned interruption. “Specifically, we found that for conventional gasoline, the most common and widely available blend, unbranded gasoline had an average 0.5¢/gal increase associated with unplanned refinery outages, while branded gasoline had a smaller increase of about 0.2¢/gal,” it said.

This suggested that, as some traders and other market participants had told GAO’s researchers, refiners generally give priority to customers with long-term supply contracts, which typically are for branded outlets, during unplanned interruptions, the report said. In such conditions, unbranded independent marketers may be forced to pay higher prices to obtain product to sell, it said. “On the other hand, industry experts told us that unbranded sellers may be able to buy wholesale gasoline at lower prices than branded sellers during normal market conditions,” it added.

Special fuel blends
GAO’s examination also found that special fuel blends with characteristics such as unusual oxygenate requirements, lower Reid Vapor Pressure requirements, or unusual oxygenate/RVP combination may be more price-sensitive to unplanned outages, the report said.

“Specifically, the largest price differences between our conventional gasoline base case and special gasoline blends were for CARB without oxygenate and conventional gasoline blended with 10% ethanol and a 7.0 RVP,” it said. “In these instances, prices were about 10¢/gal and 8¢/gal higher than our base case.”

The analysis also showed that a number of other special fuel blends’ prices did not increase significantly more than conventional gasoline’s prices during unplanned interruptions, although this depended partly on whether the gasoline was branded or unbranded, GAO said.

“Finally, it should be noted that individual outages may have different effects on prices depending on a variety of [other] factors,” the report continued. It said that one possible example might be a large shipment of a special fuel blend from Canada or overseas.

The type of equipment involved in an unplanned outage also is important, it said. A fluid catalytic cracker, because it is used to maximize gasoline production, could be expected to have more impact if it went down than a hydrotreater designed to produce distillates would, it said.

Federal data gaps
The report said that while agencies are taking steps to improve their data collection, existing federal data contain gaps which limit analyses of refinery outages’ impacts on oil product prices and which, in some cases, do not reflect emerging trends.

“These data gaps created challenges to our, and another federal agency’s, analyses and ability to respond to congressional inquiries,” it said. “Specifically, we were limited in this report in our ability to fully evaluate the price effects of unplanned outages at individual cities, and a city’s gasoline re-supply options in the event of an outage.”

GAO researchers’ ability to evaluate price effects of unplanned outages in specific cities (such as Atlanta following Hurricanes Ike and Gustav) was limited because federal data do not link refiners with the cities they serve, GAO said. Federal data exist for most other refining activities, it observed.

The congressional watchdog service said that it eventually purchased data from an energy consulting firm, Baker & O’Brien, which it found sufficiently reliable for the report’s estimates but not sufficiently accurate to estimate effects in individual cities.

It said that the absence of key data also limits federal agencies’ ability to monitor the effects of emerging trends, such as the growing use of ethanol and other biofuels, in US oil product markets. “Specifically, we found that gaps in federal data do not allow agencies to track where gasoline blended with ethanol ultimately winds up in the fuel stream,” the report said. “Not having this information may be at odds with consumers’ interests.”

Many agencies involved
It suggested that the situation is further complicated by several agencies collecting refined product data. EIA collects and analyzes data including supply, consumption, and prices of crude and products; inventory levels; refining capacity and utilization rates; and some product movements into and within the United States, it noted. Since the US Environmental Protection Agency oversees regulation of pollutants, it can grant waivers to allow product markets to be more quickly supplied during emergencies. EPA also oversees the reformulated gasoline program and the federal renewable fuel standards.

The US Department of Transportation’s Pipeline and Hazardous Materials Safety Administration deals with pipeline safety and establishes standards for crude oil and product transportation by pipeline, while the Federal Energy Regulatory Commission monitors energy markets and regulates interstate oil pipelines’ rates and practices, according to the report.

“In some cases, the individual agency efforts have resulted in the collection of information that does not necessarily meet the data needs of other agencies or analysts who monitor petroleum product markets,” it said. “For example, federal reporting efforts have evolved such that EIA maintain primary responsibility for collecting information on total gasoline supply, including gasoline blendstocks, while EPA maintains primary responsibility for capturing another characteristic, RVP, of certain gasoline blendstocks.”

Making publicly held data complete and useful, as well as reducing costs, will require each agency to be aware of its part in the overall data picture as well as its data’s usefulness beyond the agency’s immediate mission, the report said. “Continued and improved coordination between such agencies, including EIA, EPA, DOT, and FERC, could improve the collective understanding and oversight of the refining industry and petroleum product markets,” it suggested.

The report recommended that the EIA’s administrator assemble a panel of representatives from these and other federal agencies, the oil industry, public stakeholders, and other analysts and data users to develop a coordinated interagency strategy for closing data gaps. It said that such a panel could assess the costs and benefits of collecting more systematic information about which refiners serve which cities, and more discrete information about petroleum products’ entry, flow, and exit through the US pipeline infrastructure.

Other areas of inquiry
Such a panel also could identify additional data which could be used to track emerging market trends, such as the proliferation of biofuels and special blends, and assess the costs and benefits of collecting the information. It could identify opportunities to coordinate federal data collection efforts, and areas where data collection is fragmented, such as multiple survey instruments collecting similar information, to determine if these efforts could be consolidated and modified to make the information more useful and more efficiently collected, according to the report.

It said that EIA, after reviewing a draft of the report, supported the recommendations, including suggestions to review data adequacy, strengthen inter-agency coordination, and fully engage government, industry, and public stakeholders. EIA also indicated that it believes it has a strong program to address all those suggestions and is working with other agencies through established joint programs as well as informally to coordinate data collection.

The national energy statistical and analysis service also issued public notices on Dec. 9, 2008, and Feb. 28, 2009, that it would review refinery outage data, a task it expects to complete this fall. At that time, said GAO, EIA plans to publish its analysts’ assessments and recommendations for possible additional data and seek further comment, and would consider using a panel along the lines GAO suggested in its report to determine future steps.

Asked for his initial reactions to the report, American Petroleum Institute Chief Economist John C. Felmy said on Aug. 4 that much of what GAO found was a function of what API, which compiles its own data, has been talking about for some time.

“When a refinery outage involves a specialized formula produced for a limited area, the price impact obviously is larger, for example,” he explained. “Also, the relationship of suppliers with branded and unbranded marketers is well known. Obviously, they would give preference to someone flying the company’s flag at retail outlets than someone selling under his own brand. These conclusions are not at all surprising.

“We’re willing to talk about it. The devil in the details is how much you can get at, what it would cost, and any additional burdens that would be created. But there’s a new EIA administrator, and we’d be willing to discuss it,” Felmy told OGJ.

Contact Nick Snow at nicks@pennwell.com

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